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TABLE OF CONTENTS

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LIABILITY

GENERAL ATR STANDARD

GENERAL QM DEFINITION

OTHER QM CATEGORIES

POINTS AND FEES

FURTHER CFPB AMENDMENTS PENDING

QM COMPLIANCE AND FAIR LENDING

CFPB NOT BUDGING ON JANUARY EFFECTIVE DATE

EXEMPTIONS FOR CERTAIN CREDITORS AND LENDING PROGRAMS

Lenders found to be in violation of the ATR/QM rule could face stiff penalties.

Jed Mayk, a partner at Hudson Cook LLP, noted during a recent October Research, LLC webinar that because Dodd-Frank’s ATR provisions amended the Home Ownership Equity Protection Act (HOEPA), the CFPB’s rule carries HOEPA-style penalties.

“Essentially, a violation of the rule results in liability for actual damages up to $4,000 and a statutory penalty,” Mayk said.

Violation of the ATR requirements also creates liability for enhanced HOEPA damages equal to the sum of all finance charges and fees paid, and attorneys’ fees.

“There’s also a three-year statute of limitations for a violation of the repayment-ability rule and certain other provisions rather than the normal [TILA] one-year statute of limitations,” Mayk said. He added that the rule specifically grants state attorneys general the right to enforce the ATR provisions.

Particularly troubling for lenders and other industry participants is a provision that allows a borrower to assert an ATR violation against a creditor, assignee or any holder of the loan at any time as a defense to foreclosure or other

collection action. “So if a foreclosure action is instituted, six, seven or eight years after closing, the borrower would still be able to assert this claim as a defense in the foreclosure action and essentially use damages if they’re successful to offset the amount that they owe on the loan,” Mayk said. However, he noted that Congress took steps to limit the consumer’s ability to recover enhanced HOEPA damages. If a judgment is rendered after three years, set-off liability for enhanced HOEPA damages is capped at three years. Q & A

Q: It appears that the relief available to a consumer under the rule is strictly monetary and doesn’t give the borrower the opportunity to void the lien or the security instrument, the mortgage or the deed of trust. Am I correct in that reading?

Mayk: Yes, that’s correct. It’s not listed as one of the provisions that trigger the right to rescind for example, which would result in the voiding of the lien if you had the right to rescind.

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The Consumer Financial Protection Bureau (CFPB) finalized what is arguably the new regulator’s most consequential rule on Jan. 10. As required by the Dodd-Frank Act, the CFPB’s ability-to-repay (ATR) /qualified mortgage (QM) rule amended Regulation Z, which implements the Truth in Lending Act (TILA), to generally require creditors to “make a reasonable, good faith determination of a consumer’s ability to repay any consumer credit transaction secured by a dwelling.”

Certain types of transactions are excluded from the ATR rule’s provisions, including:

•Home equity lines of credit subject to Regulation Z; •Transactions insured by timeshares; •Reverse mortgages subject to Regulation Z; •Temporary or bridge loans with a term of 12 months

or less; and • The construction phase of construction-to-permanent loans, if the construction phase is 12 months or less.

The rule establishes a 43 percent debt-to-income (DTI) ratio threshold for QMs. However, the final rule also creates a temporary category of QMs that has more flexible underwriting requirements. The bureau said it crafted this temporary provision because it fears lenders will initially be reluctant to write loans that are not QMs, even though the loans are responsibly underwritten. The final rule answers the question of whether the writing of a QM should afford lenders a compliance safe harbor. Under the final rule, lenders would be granted a legal safe harbor when they write a QM loan that is also a prime loan. The CFPB, however, chose to establish a rebuttable presumption of compliance for subprime QMs.

In addition, on May 29, the bureau finalized ATR/QM rule amendments that would provide QM status for certain loans made and held in portfolio by small creditors, such as community banks and credit unions.

Lenders have until January 2014 to comply with the amendments and the final rule.

Additional rule amendments and clarifications have also been proposed and further proposed amendments are expected.

ATRQM

4

LIABILITY

FOUR MAIN CONCEPTS The CFPB’s ATR/QM rule permits lenders to choose whether to write a loan under the general ATR standard. In this case, a lender must collect and verify certain information, but there are no restrictions on loan product features. In the alternative, lenders seeking certain legal protections can choose to write a QM, a type of loan that does not include certain product features and meets other criteria set forth by the bureau. CFPB leaders have encouraged community lenders who have, as a group, engaged in sound underwriting in the past to consider writing non-QM loans when appropriate. However, it’s not clear whether a robust non-QM market will eventually emerge. Richard Andreano, a partner at Ballard Spahr LLP, noted during the webinar that a lender who makes a loan subject to the general ATR standard does not gain the benefit of any presumption of compliance with the CFPB’s rule. He also said the general ATR standard set forth by the bureau is relatively simple to state, yet difficult to apply. Specifically, the standard provides that the creditor shall not make a covered loan unless that creditor makes a reasonable and good faith determination at or before consummation that the consumer will have a reasonable ability to repay that loan according to its terms.

He noted that four main concepts are built into the standard:

• An underwriting concept; • Verification of information concept; • Payment on the loan concept; and • How a lender would calculate income ratio or residual income.

“Again, the key here is the determination must be reasonable and in good faith and at or before consummation,” Andreano said.

He noted that since the bureau established that the ATR determination must be at or before consummation of the loan, industry participants questioned if events occurring subsequent to consummation will ever be taken into account when determining whether the lender actually met its obligations under the ATR requirements. Andreano said it appears there are instances where subsequent events could be taken into account.

“That actually cuts both ways,” Andreano said. “For instance, the commentary notes that an early payment default would often be persuasive evidence that the creditor did not have a reasonable, good faith belief of the consumer’s ability to repay. However, the commentary also notes that if the consumer had experienced a sudden and unexpected loss of income, then the creditor’s decision may, in fact, have been reasonable and in good faith.”

PROJECTING THE SIZE OF THE QM AND NON-QM MARKETS

The U.S. House Subcommittee on Financial Institutions and Consumer Credit held a hearing on May 21 to discuss the potential impact of the ATR/QM rule. Lawmakers worried that many loans written in recent years would not have fit within the QM box established by the bureau.

QM MARKET

Peter Carroll, assistant director for Mortgage Markets at the CFPB, testified that bureau models indicate roughly three quarters of the loans written in recent years would meet the QM 43 percent DTI cap. He added that the vast majority of loans would qualify as QMs under the temporary QM category.

“Our objective with the rulemaking was to get closer to 100 percent, which is why we created this temporary [qualified mortgage category],” Carroll explained. “When we size that in, we think we get closer to 100 percent of recent year loans.”

While the bureau was able to gauge the impact of the QM DTI requirements, Kelly Cochran, CFPB assistant director for regulations, acknowledged that the agency did not have the data to model the impact of the rule’s 3 percent cap on points and fees. Lawmakers worried about the impact of the 3 percent cap on the size of the QM market and they expressed a desire for further research on this topic.

NON-QM MARKET

Carroll was optimistic that lenders will become increasingly comfortable with the prospect of writing non-QM loans.

“Over time, based on our analysis, we do think it is possible to quantify the risks associated with non-qualified mortgage lending,” Carroll said. “We think that’s something market participants will do over the course of the next few years as they become comfortable with the rule.”

Cochran said the non-QM market would likely develop in niches and spread to other parts of the market “as people get more comfortable and see specific business opportunities that make sense for their models.”

“We just believe that there [are] going to be lenders who are going to make loans where they understand the nature of the loans they’re working with,” Carroll explained. “We’ve seen some interest-only, jumbo products that we suspect will continue on when the rule takes effect.”

Rep. Patrick McHenry, R-N.C., disagreed that many lenders would choose to write non-QM loans. He discounted Carroll’s examples, noting that the mortgage products he referenced account for an “incredibly small” portion of the overall market.

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GENERAL ATR STANDARD

UNDERWRITING

At a minimum, creditors generally must consider eight underwriting factors when making an ability-to-repay determination:

• Current or reasonably expected income or assets; • Current employment status; • The monthly payment on the covered transaction; • The monthly payment on any simultaneous loan; • The monthly payment for mortgage-related obligations; • Current debt obligations, alimony and child support; • The monthly debt-to-income ratio or residual income; and • Credit history.

While the underwriting factors are straight forward, their application may prove challenging. Andreano noted that the CFPB included guidance on applying these underwriting factors. However, the bureau also said its rule and accompanying commentary “do not provide comprehensive guidance on definitions and other technical underwriting criteria necessary for evaluating these factors in practice.”

So what’s a lender to do?

Under the bureau’s guidance, as long as a creditor complies with the rule, the creditor is permitted to use its own definitions and other underwriting criteria. Further, the bureau said a creditor “may, but is not required to, look to guidance issued by entities such as [the Federal Housing Administration, Department of Veterans Affairs, Department of Agriculture], or Fannie Mae or Freddie Mac while operating under conservatorship.”

“However, as required by [the rule], a creditor must ensure that its underwriting criteria, as applied to the facts and circumstances of a particular extension of credit, result in a reasonable, good faith determination of a consumer’s ability to repay,” the CFPB continued.

“In other words, you’re on your own. And each case will be determined based on its individual facts and circumstances,” Andreano said. He added, however, that the rule’s commentary generally provides that the longer the consumer makes timely payments, the less likely the lender’s ability-to-repay determination would be deemed to be unreasonable or to have been made in bad faith.

VERIFICATION

The CFPB’s rule provides that, in general, a creditor must verify the information relied upon in determining a consumer’s ability to repay using reasonably reliable third-party records.

Andreano noted that such third-party verifications must be unique to the borrower.

“Obtaining generalized income data for consumers in similar roles in that area is not sufficient,” He said. The data must relate to the particular consumer.”

Andreano said a creditor may verify employment status orally, if it documents the information that was obtained from the employer during that oral exchange. Further, if a creditor relies on a credit report to verify debt obligations and the consumer’s application reflects a debt that is not shown on the credit report, the creditor does not have to independently verify that debt.

A creditor may also obtain records directly from the consumer, such as a payroll statement, if the records are reasonably reliable and specific to the consumer.

“Of course creditors usually don’t want to solely rely on [consumer-provided records] because of the concerns of fraud and they will separately verify the information that’s in there,” Andreano noted. “But a third-party record would include records from the consumer such as their payroll statements.”

During the recent Independent Community Bankers of America (ICBA) Convention and Techworld in Las Vegas, John Redding, a partner in the Los Angeles and Orange County offices of Buckley Sandler LLP, discussed numerous ATR rule provisions that lenders should be aware of.

Redding noted that the verification requirement only applies to information the lender relies upon to qualify the borrower. “Let’s assume that a borrower has two jobs. If the income from only one of those jobs is used to qualify the borrower for the loan, then it’s the information relative to income for that particular job that you’re required to verify,” Redding explained. “If the second job is not taken into account, there would not be a requirement to verify that particular information through reliable third-party sources.”

PAYMENT CALCULATION

To assess the monthly payment on the covered loan, the creditor must determine a payment amount based on the higher of the fully-indexed rate or introductory rate, and on monthly, fully amortizing payments that are substantially equal.

Andreano noted that the CFPB included special rules for calculating payments for balloon loans and loans with interest only and negative amortization features. He reserved those rules for “the brave at heart.”

“The general ability-to-repay standard does not prohibit loans with those features,” Andreano said. “However, the belief is because of the risks associated with loans with those features, those types of loans will probably be relatively scarce.” The CFPB’s rule provides that for purposes of determining a consumer’s ability to repay a loan, a creditor must include consideration of any simultaneous loan that it knows or has reason to know will be made at or before consummation of the covered transaction.

“If the simultaneous loan would also be a covered loan, you’d follow the rule for covered loans,” Andreano said.

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SAFE HARBOR AND REBUTTABLE PRESUMPTION

Lenders seeking certain legal protections under the CFPB’s rule can chose to write a QM loan. These loans must meet certain underwriting criteria set forth by the bureau. Many of the criteria are similar to the underwriting factors that lenders must consider when making repayment determinations as set forth under the general ATR standard. The rule establishes a 43 percent DTI ratio threshold for QMs. The bureau’s QM definition also includes certain product feature restrictions.

The Dodd-Frank Act provided that QMs are entitled to a presumption that the creditor making the loan satisfied the ATR requirements. However, the act did not specify whether the presumption of compliance is conclusive or is rebuttable. In the run-up to the release of the CFPB’s final rule, industry participants and consumer advocates argued over whether QM should provide lenders with a compliance safe harbor, or if borrows should be permitted to rebut the presumption of ATR compliance when a QM loan is written.

The CFPB’s final rule employs both approaches — the underwriting of a higher-priced QM is afforded a rebuttable presumption of compliance, while the underwriting of a QM that is not higher-priced is afforded a compliance safe harbor.

Mayk said a higher-priced QM is essentially a loan that meets all the requirements of a QM and trips certain existing triggers

for higher-priced coverage as set forth in Regulation Z Section 1026.35. Specifically, a higher-priced QM is a QM loan where the annual percentage rate (APR) exceeds the average prime offer rate (APOR) as of the date the rate is set for the last time before closing by 1.5 or more percentage points for a first lien loan, or by 3.5 or more percentage points for a junior lien loan.

“The definitions in the QM rule essentially cross reference … the higher-priced mortgage rules in 1026.35, so those should be consulted as to what is an average prime offer rate [and] what interest rate you use,” Mayk said. “The published tables of the average prime offer rates have detailed rules for determining what is and is not a comparable transaction for a particular loan. Most of this stuff is already embedded into loan origination systems today and will just be used again to determine … whether it’s a safe harbor QM or a rebuttable presumption QM.”

A consumer seeking to rebut the presumption of compliance associated with a higher-priced QM loan would have to show that the creditor did not make a “reasonable and good faith” determination of repayment ability. The borrower would accomplish this by showing that he/she was left with insufficient residual income to pay the loan.

“That essentially means that even if the loan met the DTI requirement to be a QM of 43 percent, if the consumer should [show] that their income was so little after making the loan payment and other mortgage related obligations and other obligations to pay basic living expenses, they would be able to

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GENERAL QM DEFINITION

“If it’s a home equity line of credit subject to Regulation Z, what you would do to calculate the payment under that is determine how much would be drawn at or before consummation and then what the payment of that amount would be under the plan’s terms.”

DTI OR RESIDUAL INCOME CALCULATION Creditors are required to consider the DTI ratio or residual income the consumer will have after paying non-mortgage debt and mortgage-related obligations, as part of the ability-to-repay determination.

“A creditor must assess one or the other. That’s the minimum requirement under the rule,” Andreano said. However, he noted that creditors are free to examine both. Mitigating or compensating factors also can come into play.

“For instance, if the consumer had significant assets other than the security property and those assets could be made available to help pay the loan, that would be an example of a compensating factor,” Andreano said.

When calculating DTI, a creditor must consider the consumer’s total monthly debt obligations and total monthly income. Total monthly debt obligations include payment on covered

transaction, payment on simultaneous loans, mortgage-related obligations, debt obligations, alimony and child support. Total monthly income includes the consumer’s current or reasonably expected income, including any income from assets.

“There is some guidance in the commentary on reasonably [expected income] such as someone who may be moving to a new job and has an offer letter with their income stated in that. That might be a situation where you could rely on that income,” Andreano said.

When calculating residual income, a creditor must consider the consumer’s remaining income after subtracting the consumer’s total monthly debt obligations from the consumer’s total monthly income. Q & A

Q: Is there a standardized, acceptable calculation for determining minimum required residual income?

Mayk: There’s not anything specific in the rule but there are guides out there. For example, Veterans Administration loans have had residual income components in their underwriting guidelines for many years.

successfully rebut the presumption that the loan qualified with the ATR rule based on their insufficient residual income.”

Under the rule, the longer the consumer has paid on the loan, the more difficult this showing will be, Mayk noted.

When a loan that meets the QM requirements is not a higher-priced loan, a borrower cannot make a residual income argument.“That is the safe harbor,” Mayk said. “If the loan is not higher-priced and otherwise meets the standards for a QM, it cannot violate the ATR rule.”

PRODUCT FEATURES

Mayk noted that there are two basic components to the definition of a QM: product-specific features and underwriting standards. The Dodd-Frank Act set forth certain product feature prerequisites for QMs and the final rule implements the statutory criteria, which generally prohibit loans with negative amortization, interest-only payments, balloon payments or terms exceeding 30 years from being QMs. The rule includes a narrow exception for certain balloon payment loans. The final product-specific feature is that the loan generally cannot have points and fees that exceed 3 percent of the total loan amount. “The 3 percent trigger is for loans over $100,000,” Mayk noted. “If you are under $100,000, there are different thresholds. Some of them are dollar amount thresholds. Some of them are still a percentage of the total loan amount thresholds.”

For example, Mayk noted that points and fees cannot exceed $3,000 for loans between $60,000 and $100,000. He added that there is an important distinction to be drawn between the terms “loan amount” and “total loan amount.” “The ‘loan amount’ is the face amount on the note, and that is used to determine which tier of loan amount you end up in to determine which points and fees trigger you have,” Mayk said. “Once you’re in there, you use the normal high-cost ‘total loan amount’ definition to calculate whether the points and fees on the loan exceeded the total loan amount if it’s a percentage-based tier.”

UNDERWRITING STANDARDS MONTHLY PAYMENT

The CFPB’s rule sets forth several requirements intended to facilitate the creditor’s ability to assess the borrower’s monthly payment, income and debt picture. The ultimate goal is to ensure the appropriate calculation of the DTI ratio, which is the central component of the QM standard.

The first such requirement is that the creditor must underwrite the loan, taking into account the monthly payment for mortgage-related obligations, using the maximum interest rate that may apply during the first five years after the date on which the first regular periodic payment is due. Mayk said the timeframe specified in this provision is particularly consequential. He noted that the ATR rule, as it was first proposed by the Federal Reserve, would have based this requirement on the date of consummation — not the date on which the first regulator periodic payment is due.

“By using instead ‘five years after the date on which the first regular periodic payment is due,’ the bureau is going to be capturing five-year ARM [adjustable rate mortgage] loans at the time they recast to a potentially higher rate,” Mayk said. “That’s the rate you would have to use to apply to help determine what the monthly payment is going to be.

“You also have to factor in things like discounts, premiums, annual adjustment caps and maximum lifetime caps on the interest rate,” Mayk continued. “There are a series of examples in the commentary that run through various different scenarios — is it a five-year ARM, a three-year ARM, is it a discounted ARM — that you should consult to really get a sense of what they’re driving at here.”

The rule also provides that the loan must be underwritten taking into account the monthly payment for mortgage-related obligations using either:

• Periodic payments of principle and interest that will repay either the loan amount over the term; or • The outstanding principal balance over the remaining term as of the earliest date the maximum interest rate during the first five years after the date on which the first regular periodic payment is due can take effect.

Mayk noted that while the language the CFPB chose to use for this requirement is “clunky,” the bureau is giving creditors an important option regarding how the periodic payment may be determined. He provided an illustrative example.

“On an adjustable rate loan, if you were to use the maximum rate at a period — at say five years out if it’s a five-year ARM — if you were to apply it to the original principle balance, you’d end up with a higher monthly payment than the borrower could ever realistically pay,” Mayk noted. “So the bureau has given creditors the option of using the principle balance that was in effect on the date when the maximum rate during the first five years was reached. So creditors will have the option to

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REGULATORY RELIEF BILL WOULD AMEND KEY DODD-FRANK MORTGAGE PROVISIONS A U.S. House Republican introduced legislation intended to lighten community institutions’ regulatory burden. The bill, HR 1750, sponsored by Rep. Blaine Luetkemeyer, R-Mo., would address a range of issues from annual privacy notice requirements to internal controls assessment mandates set forth under the Sarbanes-Oxley Act.

For more on this story or news on Congressional Activities, go to DoddFrankUpdate.com

TEMPORARY QM

In its final rule, the bureau said consumers can often afford a loan with a DTI ratio above 43 percent based on their particular circumstances and that such loans are better evaluated on an individual basis under the general ATR criteria rather than with a blanket presumption as set forth under the rule’s QM provisions. However, the bureau said it is concerned that creditors may initially be reluctant to make loans that are not QMs, even though they are responsibly underwritten. For this reason, the final rule provides for a second, temporary category of QMs that have more flexible underwriting requirements.

Under this category, a loan where the borrower has a DTI ratio over 43 percent can still be a QM if: the loan meets each of the QM product feature criteria mentioned earlier — such as the limitations on points and fees and loan term; and the loan is eligible for purchase or guarantee by government sponsored enterprises Fannie Mae, Freddie Mac (or any successor while under conservatorship), or insured or guaranteed by the Federal Housing Administration (FHA), Veterans Administration (VA), U.S. Department of Agriculture (USDA) or Rural Housing Service (RHS). “The loan only has to meet the eligibility requirements for purchase, insurance or guarantee,” Mayk explained. “It doesn’t

actually have to be sold to Fannie or Freddie or insured by FHA for example.”

He also noted that this QM category is special because it will sunset in January 2021 at the latest. In some cases, it could sunset even earlier. This QM category as it applies to Fannie, Freddie or any limited-life successor, will sunset when such entity is no longer under conservatorship or receivership.

“As for the government agencies — FHA,VA, USDA and RHS — those entities have authority to establish their own QM definition for purposes of their own loan programs and once they do, this limited exemption sunsets as to that particular agency’s QM rule,” Mayk said.

SMALL CREDITOR QM

The CFPB’s January ATR/QM final rule establishes a 43 percent DTI ratio threshold for QMs. However, the May 29 final rule amendments provide flexibility intended to preserve borrowers’ access to credit from small creditors.

Like the proposal, small creditors are defined in the final amendments as creditors with no more than $2 billion in assets that, along with affiliates, originate no more than 500 first-lien mortgages covered under the ATR rules per year. The bureau noted in its final amendments that it rejected industry participants’ calls to raise these origination and asset thresholds.

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OTHER QM CATEGORIES

do one or the other in determining the periodic payment.” INCOME OR ASSETS

The rule includes certain factors the creditor must consider and verify. These include: The consumer’s current or reasonably expected income or assets (other than value of the dwelling); and the consumer’s current debt obligations, alimony and child support obligations.

The CFPB set forth special rules for considering and verifying the consumer’s current or reasonably expected income or assets. Appendix Q to the final rule establishes what income must be considered and how it must be considered.

“Creditors have to consider and verify all of the income that is in Appendix Q that a consumer might have,” Mayk said. “They are free to consider other income but that does not get included in the total monthly DTI determination that they have to do.” As with the general ATR standard, all income or assets considered must be verified with third-party records that provide reasonably reliable evidence of the consumer’s income or assets. Mayk said such records would include IRS tax transcripts and copies of filed tax returns.

DEBT OBLIGATIONS The rule establishes a similar process for considering the consumer’s debt obligations, alimony and child support. All debts and liabilities specified in Appendix Q must be considered as set forth in the appendix. Other debt may be considered, but would not be included in the total monthly DTI determination.

The rule provides that if a credit report is the method used to verify the debts, and the loan application shows a debt that is not listed on the credit report, the creditor is not required to independently verify that particular debt.

43 PERCENT DTI

As noted earlier, a QM loan generally may not have a DTI ratio of more than 43 percent.

“Again, you follow the standards in Appendix Q in doing the calculation; except you have to use the special rules about determining the maximum interest rate during the first five years of the loan,” Mayk said.

Any simultaneous loan of which a creditor is aware must also be factored into the DTI calculation. The CFPB included specific calculation rules for these loans depending on whether the loan is closed- or open-ended.

The final amendments adopt a proposed QM category for certain loans originated and held in portfolio for at least three years — subject to certain limited exceptions — by small creditors. The loans must meet the general restrictions on QMs with regard to loan features and points and fees, and creditors must evaluate consumers’ DTI ratio or residual income. However, the loans are not subject to a specific DTI ratio as they would be under the general QM definition.

The QM small creditor portfolio category includes only loans held in portfolio by small creditors. Therefore, if a creditor agreed prior to consummation to sell a loan, that loan would not be a QM under the proposed definition, the CFPB explained in its proposal. The rule would provide an exception that would allow forward commitments to sell to a creditor that also meets the limits on asset size and number of first-lien covered transactions.

As required under the ATR final rule, when underwriting the loan, the creditor is required to consider and verify the consumer’s income and assets and base the underwriting on a monthly payment calculated using the maximum interest rate that may apply during the first five years of the loan and that is fully amortizing.

The May 29 amendments also permit small creditors to charge a higher annual percentage rate for first-lien QMs in the QM small creditor portfolio category and still benefit from the conclusive presumption of compliance set forth under the safe harbor.

Under the bureau’s ATR final rule, first-lien QMs with an annual percentage rate less than or equal to the average prime offer rate plus 1.5 percentage points and subordinate-lien QMs with an annual percentage rate less than or equal to the average prime offer rate plus 3.5 percentage points are within the safe harbor. QMs with annual percentage rates above these thresholds are presumed to comply with the ATR rules, but a consumer can rebut that presumption under certain circumstances. The CFPB’s May 29 amendments grant safe harbor status to small creditor portfolio QMs if the annual percentage rate is equal to or less than the average prime offer rate plus 3.5 percentage points for both first-lien and subordinate-lien loans.

BALLOON PAYMENT TRANSITION QM

The bureau’s January ATR/QM rule generally provides that a balloon-payment mortgage cannot be a QM. However, the rule also implemented a special provision of Dodd-Frank that would treat certain balloon-payment mortgages as QMs if they are originated and held in portfolio by small creditors operating predominantly in rural or underserved areas.

Many industry participants argued that the CFPB’s “rural” definition is too narrow and they urged the bureau to reconsider the scope of this provision.

The CFPB’s May 29 ATR/QM amendments respond to these

concerns by providing a two-year transition period during which small creditors that do not operate predominantly in rural or underserved areas can offer balloon-payment QMs if they hold the loans in portfolio. The bureau did not amend the “rural” or “underserved” definitions. However, the CFPB said the two-year transition period would give the agency time to study whether the definitions should be adjusted and to work with small creditors to transition to other types of products, such as ARMs, that satisfy other QM definitions.

Under the QM balloon exception, creditors are required to determine at or before consummation that the consumer can make all scheduled payments, other than the balloon payment.

Like the small creditor portfolio category, this QM category is only available to creditors: • With affiliates, made 500 or fewer covered transactions in prior calendar year; and • As of Dec. 31, had assets of less than $2 billion.

Subject to limited exceptions, the loan in question must be retained for at least three years unless sold to another qualifying creditor. The loan must conform to the other general QM requirements mentioned earlier, for instance, the ban on negative amortization and the limitation on points and fees. The loan must provide for substantially equal scheduled payments with a maximum 30-year amortization period. The interest rate may not increase. The rule also sets the minimum loan term for balloon-payment QMs at 5 years.

As noted earlier, consumers may rebut the presumption of QM compliance for first-lien and subordinate lien loans that exceed certain percentage rate thresholds. The bureau’s May 29 amendments extend the QM safe harbor to first-lien balloon loans made and held in portfolio by small creditors that have an annual percentage rate between 1.5 and 3.5 percentage points above the APOR.

REFINANCE OF A NON-STANDARD MORTGAGE

The final rule provides special provisions intended to encourage creditors to refinance “non-standard mortgages”— which include various types of mortgages which can lead to payment shock that can result in default — into “standard mortgages” that reduce consumers’ monthly payments. Under this option, a creditor refinancing a non-standard mortgage into a standard mortgage does not have to consider the eight specific underwriting criteria under the general ATR option, if certain conditions are met.

“For the purposes of this exception, a non-standard mortgage is an ARM loan with an intro fixed period of one year or longer, a loan with an interest only feature, or a loan with a negative amortization feature,” Andreano explained. “A standard mortgage would be a loan covered by the rule that has regular periodic payments, the balance cannot increase, nor can the consumer defer repayment of principle, nor could there be a balloon payment.”

Under these special rules, the standard mortgage would be

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required to have an interest rate that is fixed for a minimum of five years after consummation. The total points and fees are subject to the general QM points and fees limitations. The loan proceeds are also limited to paying off the non-standard mortgage and the payment of certain settlement costs.

Several other conditions apply to the refinance of a non-standard mortgage, including:

• The creditor for the standard mortgage must be the current holder of the non-standard mortgage or the servicer acting on holder’s behalf; • The monthly payment for the standard mortgage must be materially lower than payment for the non-standard mortgage, as calculated under the rule; • The creditor must receive the application for the standard mortgage no later than two months after the non-standard mortgage has recast. • In relation to the non-standard mortgage, the borrower may have no more than one payment more than 30

days late during 12-month period preceding the receipt of the application for the standard mortgage, and no payment more than 30 days late within the six-month period preceding receipt of the application for the standard mortgage; • If the non-standard mortgage was consummated on or after Jan. 10, 2014, it was required to have been made in accordance with general ability-to-repay standard or general QM exception; and • The creditor must consider whether the standard mortgage likely will prevent a default by the consumer on the non-standard mortgage once the loan is recast.

Andreano noted that instead of having a maximum 30-year term, the standard mortgage refinance can have a 40-year maximum term. He said this provision may make it easier for the refinance to meet the condition that the monthly payment for the standard mortgage must be materially lower than the payment for the non-standard mortgage.

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FANNIE, FREDDIE WILL ONLY PURCHASE QMS, FHFA SAYS

The Federal Housing Finance Agency (FHFA) directed government sponsored enterprises Fannie Mae and Freddie Mac to limit their future mortgage acquisitions to loans that meet the requirements for a qualified mortgage (QM), including those that meet the Consumer Financial Protection Bureau’s (CFPB) special or temporary QM definition, and loans that are exempt from Dodd-Frank’s ability-to-repay requirements.

Beginning Jan. 10, 2014, Fannie Mae and Freddie Mac will no longer purchase a loan that is subject to the CFPB’s ability-to-repay/QM rule if the loan:

• Is not fully amortizing; • Has a term of longer than 30 years; or • Includes points and fees in excess of 3 percent of the total loan amount, or such other limits for low balance loans as set forth in the CFPB’s rule.

“Effectively, this means Fannie Mae and Freddie Mac will not purchase interest-only loans, loans with 40-year terms or those with points and fees exceeding the thresholds established by the rule,” the FHFA wrote.

Fannie Mae and Freddie Mac will continue to purchase loans that meet the underwriting and delivery eligibility requirements stated in their respective selling guides. This includes loans that are processed through their automated underwriting systems and loans with a debt-to-income ratio of greater than 43 percent. Loans with a debt-to-income ratio of more than 43 percent are not eligible for protection as QMs under the CFPB’s final rule unless they are eligible for purchase by Fannie Mae and Freddie Mac under the special or temporary QM definition.

The agency said adoption of these new limitations by Fannie Mae and Freddie Mac “is in keeping with FHFA’s goal of gradually contracting their market footprint and protecting borrowers and taxpayers.”

Additional details were set forth in a pair of May 6 lender letters.

As previously noted, a loan cannot be a QM if the points and fees paid by the consumer exceed certain thresholds set forth in the final rule. The rule provides certain exclusions for “bona fide discount points.”

The rule generally limits points and fees to 3 percent of the total loan amount for loans of $100,000 or more. The CFPB’s points and fees caps for lower balance loans are based on certain dollar and percentage caps.

The CFPB’s dollar or percentage limits for lower balance loans include:

• $3,000 for loans of $60,000 to less than $100,000; • 5 percent of the total loan amount for loans of $20,000 to less than $60,000; • $1,000 for loans of $12,500 to loans less than $20,000; and • 8 percent of the total loan amount for loans less than $12,500.

Dollar amounts are subject to annual adjustment for inflation and Andreano noted that the CFPB plans to publish this information. He also said the CFPB’s definition of “total loan amount” may complicate the processes of determining which points and fees cap to apply to a particular loan.

“Unfortunately ‘total loan amount’ is not the total loan amount,” Andreano said. “It is a term of art. It is taking the amount financed and then subtracting your so called ‘4(c)(7) items’ under [TILA]. Those typical items that are excluded from the finance charge such as title, appraisal and credit report —you would subtract that. You also subtract credit life or related-type premiums. Any prepayment fee amount on the current loan that is being paid off would be subtracted if they’re both included in points and fees and financed by the creditor.”

The rule provides that fees included in the points and fees cap are those that are “known at or before” consummation, not simply those points and fees that are payable at that time, Andreano noted.

“Does that mean fees that could be payable after consummation get pulled into points and fees? Yes, in some cases, in fact they do,” he said.

POINTS AND FEES EXCLUSIONS MORTGAGE INSURANCE The rule provides various exclusions from points and fees for mortgage insurance and certain bona fide discount points. For instance, Mayk noted the rule provides a complete exclusion for premiums or charges imposed under any federal or state agency program for guarantee or insurance against the consumer’s default or other credit loss.

“The rule also makes clear that private mortgage insurance premiums or charges that are payable after consummation are completely excluded,” Mayk said.

In addition, the rule creates a limited exclusion for private mortgage insurance (PMI) premiums and charges that are payable at or before consummation. In this instance, the PMI premium or charge payable at or before consummation is excluded up to the amount that equals the amount that would have been paid for an FHA loan, provided that two conditions are satisfied.

These conditions are:

• The premium or charge is refundable on a pro rata basis; and • The refund is automatically issued upon satisfaction of the mortgage.

“This exclusion applies to any portion of the PMI charge that is up to the FHA limit. Any portion over that amount has to get included in the points and fees regardless of whether it’s paid in cash or financed or whether the mortgage insurance was required or optional,” he said. BONA FIDE DISCOUNT POINTS

Mayk noted that current federal law provides no points and fees exclusions for bona fide discount points. However, lawmakers decided to add exclusions when they set QM’s points and fees cap and caps that trigger certain protections for high-cost loans.

“They’ve created a partial exclusion for discount points that qualify as bona fide discount points,” Mayk said. “If a discount point doesn’t meet the definition of bona fide, then it’s included completely [in points and fees] and this exclusion does not apply to it at all.”

Under the rule, a bona fide discount point is 1 percent of the loan amount that reduces the interest rate based on a calculation that is “consistent with established industry practices for determining the amount of reduction in the interest rate” for the amount of discount points paid. Mayk noted that guidance provided by Fannie and Freddie may be relied upon to determine what constitutes a sufficient reduction in rate in exchange for a discount point.

Once a creditor determines that a discount point is bona fide, it must determine whether and how much of the point may be excluded from points and fees. “You can exclude up to 2 bona fide discount points if the undiscounted rate does not exceed the average prime offer rate by more than one percentage point. This is the same average prime offer rate that we looked at in determining whether the loan is a higher-priced loan or not,” Mayk noted. “If you haven’t excluded any discount points under that

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POINTS AND FEES

provision, you still have the opportunity to exclude up to one bona fide discount point if the undiscounted rate does not exceed the APOR by more than two percentage points.”

If the undiscounted rate exceeds the APOR by more than two percentage points, the creditor may not exclude any bona fide discount points from the points and fees calculation.

“Basically, what the CFPB is saying is they don’t want you to jack the rate up and have the borrower pay discount points,” Mayk said. “They’re limiting your ability to exclude discount points to situations where the undiscounted rate is within a fair range of the [APOR] of that loan.”

PREPAYMENT PENALTIES

If a loan has a prepayment penalty, the maximum prepayment penalty that can be charged or collected on the loan must be included in points and fees. The rule defines a prepayment penalty as a charge imposed for paying all or part of the principle before the date on which it is due. However, Mayk noted that the rule provides some important exceptions. For instance, under the rule, the prepayment penalty does not include a waived, bona fide third-party charge that the creditor imposes if the consumer prepays in full sooner than 36 months after consummation.

“This is essentially a closing cost recapture provision, but there are two important qualifications. It’s limited to bona fide third-party charges, so it would not cover a fee that recoups a lender’s charge if the loan is repaid within 36 months,” Mayk said. “Thirty six months is the maximum period. You can’t recapture closing costs beyond that without it being considered a prepayment penalty.”

The second exclusion from the definition of prepayment penalty is interest charged consistent with the monthly interest accrual amortization method on FHA loans consummated before Jan. 21, 2015.

“Basically for FHA loans, if the loan is paid off before month’s end, FHA requires you to still collect until month’s end,” Mayk said. “FHA is going to try to get its documents in order between now and Jan. 21, 2015, to change that so loans closed before that time will be able to continue to have interest collection done under the way it is today with FHA loans, but not after that point.”

In addition, prepayment penalties do not include:

• Fees imposed for preparing documents when a loan is paid in full if such fees are imposed whether or not loan is prepaid (e.g., payoff statement, reconveyance document, lien release document); and • Guarantee fees. As mentioned earlier, the rule requires the creditor to include in points and fees the maximum prepayment penalty that can be charged or collected on the loan. “The creditor has to assume that the loan is going to be prepaid immediately and figure out what the maximum

amount of the prepayment penalty could be and include that amount in points and fees,” Mayk said. “The creditor also has to include in points and fees any prepayment penalty incurred in a refinance with the current holder of the existing loan, a servicer acting on behalf of that current holder or an affiliate of either. So those two components would now have to go into points and fees if the fees qualify as a prepayment penalty.”

WHAT'S IN POINTS AND FEES LO COMP The Dodd-Frank Act generally provides that points and fees for a QM may not exceed 3 percent of the loan balance and that points and fees in excess of 5 percent will trigger the protections for high-cost mortgages under the Home Ownership and Equity Protection Act (HOEPA). Dodd-Frank also included a provision requiring loan originator compensation to be counted toward these thresholds.

Notably, the bureau’s January ATR/QM final rule provided that loan originator compensation includes compensation paid both to companies and to individuals. However, the CFPB later determined that it should reexamine the individual compensation issue. Despite the bureau’s clarifications regarding LO Comp and the QM rule’s points and fees provisions, some questions remain.

When the CFPB finalized its ATR/QM rule, it released a proposal seeking comment on how to apply these requirements in situations where payments pass from one party to another over the course of a mortgage transaction. The bureau was particularly concerned about “double counting” of compensation that could occur in instances where the creditor pays compensation to a mortgage broker or its own loan originator employees.

Like the proposal, the bureau’s May 29 final amendments exclude from points and fees loan originator compensation paid by a consumer to a mortgage broker when that payment has already been counted toward the points and fees threshold as part of the finance charge. The final rule also excludes from points and fees compensation paid by a mortgage broker to an employee of the mortgage broker because that compensation is already included in points and fees as loan originator compensation paid by the consumer or the creditor to the mortgage broker.

In a noteworthy change from the proposal, the final amendments exclude from points and fees compensation paid by a creditor to its loan officers.

“The bureau already has determined that compensation paid by a mortgage broker to its loan originator employees need not be included in points and fees. The bureau concludes that it should use its exception authority to exclude the compensation that creditors pay to their loan officers from points and fees as well,” the CFPB wrote in the preamble to its final rule amendments. “The bureau determines that including compensation paid by creditors to their loan officers

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in points and fees at this time not only would impose a severe compliance burden on the industry, but also would lead to distortions in the market for mortgage loans and produce anomalous results for consumers.” The final amendments, however, retain an “additive” approach for calculating loan originator compensation paid by a creditor to a loan originator other than an employee of the creditor. Under the additive approach, the rule requires that a creditor include in points and fees compensation paid by the creditor to a mortgage broker, in addition to up-front charges paid by the consumer to the creditor that are included in points and fees.

Andreano spoke to Dodd Frank Update about the bureau’s decision regarding creditor-paid broker compensation during the 2013 National Settlement Services Summit in Cleveland.

“The bureau … thought it was appropriate to have the inclusion of creditor-paid broker compensation and that the solution to avoid double counting was, they said, to have the consumer pay the broker and not the creditor,” Andreano noted. “So, instead of the creditor charging an origination point and then paying that to the broker where you’d count it twice, [the bureau suggested] to just have the consumer pay the broker.”

However, paying broker compensation may not be a good option for the consumer looking to limit his/her upfront cash payment. Andreano also said it’s unclear how this provision of the QM rule will interact with the CFPB’s loan originator compensation rule, which provides that compensation — including consumer-paid compensation — must not vary based on the terms of the loan or a proxy for the terms.

“The issue for the bureau is how do you plan to assess that?” Andreano said.

Andreano said creditors will also want the bureau to provide guidance regarding what steps, if any, they will need to take to ensure that consumer-paid broker compensation isn’t somehow impacted by the loan terms. At the very least,

creditors will need to know what policies and procedures they should adopt to comply with this restriction. Andreano said the tension between the two rules could lead creditors to consider prohibiting consumer-paid broker compensation or permitting such compensation only when the consumer pays the broker what the creditor would have paid the broker. SETTLEMENT SERVICES

Under the final rule, points and fees also include the Regulation Z Section 1026.4(c)(7) charges mentioned earlier, such as credit report, appraisal and title charges except for amounts held for future payment of taxes. Other charges may also be excluded from points and fees, but only if three conditions are met:

• The charge is reasonable; • The creditor receives no direct or indirect compensation in connection with the charge; and • The charge is not paid to an affiliate of the creditor.

Many industry participants, particularly affiliated title insurance companies, had opposed this provision on the grounds that it discriminated against companies in affiliated business relationships.

The CFPB acknowledged these concerns in its final rule, but the bureau ultimately concluded that Congress had considered the issue when it wrote the provision regarding fees paid to affiliates into the Dodd-Frank Act.

Andreano noted that some industry participants are backing legislation that would amend this provision.

“It does not appear that any help would be coming from the bureau in terms of affiliate fees,” Andreano said. “It looks like anything there would have to come from Congress.”

The title and mortgage industries are both watching the definition of points and fees within the qualified mortgage (QM) rule as the final outcome could alter affiliated settlement relationships going forward.

Under the Dodd-Frank Act, loans that have points and fees in excess of 3 percent of the loan amount cannot qualify for the qualified mortgage definition that allows lenders to meet the ability-to-repay test. At the moment, the fees paid to an affiliated title company will be included in the 3 percent threshold, hence the conundrum. However, the recently introduced Consumer Mortgage Choice Act (HR 1077) would change that.

Not surprisingly, the Mortgage Bankers Association (MBA) expressed support for it. MBA said HR 1077 would increase choices and lower costs for borrowers by making modifications to points and fees calculation used to determine whether a

loan meets the QM definition. These changes include:

• Excluding fees paid to lender-affiliated title entities (fees paid to unaffiliated entities are already excluded); • Preventing double counting of loan officer compensation; • Clarifying that amounts held in escrow accounts for payment of homeowners insurance, which are not retained by the lender or its affiliates, should not be included in the calculation; • Excluding lender charges necessary to cover Loan Level Price Adjustments charged by Fannie Mae and Freddie Mac; and Excluding lender-paid compensation to a correspondent bank or mortgage brokerage in a wholesale transaction. “Determining a borrower’s ‘ability to repay’ is a critical part of underwriting a safe and sustainable mortgage, and MBA has worked closely with policymakers to craft a QM rule that works

PROPOSED BILL REMOVES AFFILIATE FEES FROM POINTS AND FEES CAP

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The CFPB’s May 29 amendments exempt from the ATR/QM rules certain nonprofit and community-based lenders that work to help low- and moderate-income consumers obtain affordable housing. Among other conditions, the exemptions generally apply to designated categories of community development lenders and to nonprofits that make no more than 200 loans per year and lend only to low- and moderate-income consumers. The proposed rule would have placed the annual originations limit at 100 extensions of credit. Mortgage loans made by or through a housing finance agency or through certain homeownership stabilization and foreclosure prevention programs are also exempted from the ATR requirements.

Andreano said the housing finance agency exemption may prove to be particularly consequential.

“I think [the CFPB] realizes what’s coming — a lot of low- to moderate-income people not being able to get mortgage credit. They may only be able to do it through housing finance agency programs which are exempt,” Andreano said. “Those programs may become very robust.” Notably, the bureau opted to withdraw proposed provisions that would have exempted from the ATR requirements a

refinancing that is eligible to be insured, guaranteed or made pursuant to a program administered by the FHA, VA or USDA. The proposal would also have exempted, under certain conditions, a refinancing that is eligible to be purchased or guaranteed by Fannie Mae or Freddie Mac, such as a Home Affordable Refinance Program refinancing. Many commenters supported the proposed exemptions. However, the CFPB noted that the January ATR/QM final rule included a temporary, transitional provision that will grant QM status to loans that are eligible for purchase, insurance or guarantee by specified federal agencies, as well as GSE-eligible mortgage loans, including refinancings. The agency indicated refinancings that would have been covered under the proposed exemptions should instead be subject to these temporary QM provisions.

“The bureau believes that [temporary QM] strikes the appropriate balance between preserving consumers’ rights to seek redress for violations of TILA [Truth in Lending Act] and ensuring access to responsible, affordable credit during the current transition period,” the CFPB wrote. “Upon further review and consideration of the comments received, the bureau has determined that the proposed exemption would be inappropriate.”

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EXEMPTIONS FOR CERTAIN CREDITORS AND LENDING PROGRAMS

best for borrowers and lenders alike,” said MBA Chairman Deb Still. “In our review of the final rule, we have identified several concerns with the points and fees calculation that have the potential to limit the choices that borrowers have when selecting a mortgage and increasing the costs of getting those mortgages. This bill goes a long way toward addressing those concerns.”

From the title side, opinions vary, and the American Land Title Association is sitting out this debate for that very reason. The National Association of Independent Land Title Agents (NAILTA), though, is definitely opposed to the Consumer Mortgage Choice Act excluding lender-affiliated fees from the calculation.

“The ironic re-titling of the newly proposed bill is meant to shield the measure from public understanding of what the bill actually does,” NAILTA wrote. “The proposed bill has little to do with consumer choice and everything to do with helping referral sources, such as banks, find alternative ways to raise revenue for making mortgage loans. “The new bill is being proposed by the banking and referral source lobbies in an effort to provide those groups with a vital source of revenue — the title insurance premiums and

fees generated by those entities,” the group continued. “The proponents of HR 1077 incorrectly argue that, without the amendment, low to middle income Americans will be unable to obtain access to affordable residential mortgage loans. However, there is an incredible lack of statistical data that supports their veiled premise. An overwhelming majority of American homeowners do not prefer affiliate settlement providers or even know what an affiliate settlement provider does at the closing table.”

NAILTA is generally against any affiliated title arrangements, and upholding the points and fees definition within the QM rule is one of its main priorities now.

The bill “is meant to help those affiliates maintain monopolistic control over their customers, provide unregulated revenue streams for their lender parents and increase the cost of title insurance services for American consumers. It was introduced by banks and silently supported by their friends from within the title insurance industry who profit from these questionable business relationships,” the group wrote.

HR 1077 was introduced by Rep. Bill Huizenga, R-Mich., on March 12 and was referred to the House Financial Services Committee. A similar bill died in the committee last July.

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FURTHER CFPB AMENDMENTS PENDING

TEMPORARY QM GSE PROVISIONS

The CFPB proposed additional ATR/QM rule amendments on April 19. The proposed amendments would clarify or correct certain rule provisions regarding the ATR/QM rule’s temporary QM category and Appendix Q of Regulation Z.

The comment period for the proposal closed on June 3, and while industry participants who submitted letters to the CFPB expressed support for many elements of the bureau’s proposed changes, some concerns remain.

As noted earlier, the ATR/QM final rule provides that for a limited time, a loan that does not meet QM’s 43 percent DTI requirement may still qualify as a QM if the loan is eligible either for purchase or guarantee by Fannie Mae or Freddie Mac, or for guarantee or insurance by a federal agency such as the FHA or the VA.

The April 19 proposal would clarify that the temporary QM provision’s requirement that mortgages be “eligible” for purchase, insurance or guarantee does not exclude loans that do not satisfy certain procedural and technical requirements set forth by the agencies and GSEs, such as loan delivery requirements.

Robert Davis, executive vice president for mortgage markets, financial management and public policy with the American Bankers Association (ABA), said in a comment letter to the CFPB that the bureau should provide additional clarity regarding the distinction between underwriting requirements and requirements that are “wholly unrelated” to underwriting.

“ABA notes that there are various GSE and agency requirements where the relationship to underwriting is not straightforward or clear,” Davis said. He asked the bureau to confirm whether several specific standards are or are not related to a consumer’s ability to repay in the determination of QM status.

The bureau’s proposal would also confirm that loans meeting eligibility requirements provided in a separate agreement between a creditor and a GSE or federal agency can be QMs — not just those that follow the general GSE or agency guidelines. However, one creditor would not be permitted to rely on the terms specified in another creditor’s written agreement with a GSE or agency to establish QM status. Davis agreed with the restriction on creditors’ use of other creditors’ agreements to assess QM status. However, he said the bureau should make two specific clarifications. He said the rule should confirm that if the originator relies on contractual variances in making a QM loan, the assignee should be able to rely on that loan’s QM status, even if the assignee does not have similar written agreements with the GSEs. He also said the regulation should recognize that loans sold to GSEs are

often originated by smaller lenders acting as correspondents who sell the loans individually to a larger lender.

“The larger lender, or sponsor, acts as the entity that re-sells the loan to Ginnie Mae, Fannie Mae, or Freddie Mac as part of a pool. In such situations, the second larger lender may have written variance agreements with the GSEs,” Davis explained. “The regulations should clarify that the originating lender can rely on the written agreements of the sponsor, and that such loans will constitute a valid QM loan.

“ABA has considerable concerns regarding these points, as any alternative interpretation of the application of these provisions will cause substantial disruptions in credit flows,” Davis continued.

In addition, under the proposal, the fact that a GSE or agency demands repurchase or indemnification of a loan would not determine whether or not the loan is a QM. The bureau said this determination would be based on the specific facts and circumstances of each loan.

In his commenter letter, Ron Haynie, senior vice president of mortgage finance policy with the ICBA, noted that, under the proposal, if a loan is put back to a creditor from a GSE, or if the insurance or guarantee is denied by an agency, the loan would lose its QM status if the reason for the put back or denial is due to factors that impact the borrower’s ability to repay. He said loans should retain their QM status even if they are put back for income-related reasons.

“The calculation of income especially for self-employed borrowers, borrowers with income from multiple sources, or in general where all of the borrower’s income cannot be documented by a W2 is very subjective, and will vary from underwriter to underwriter,” Haynie said. “If a creditor has documented the income and debts in accordance with their understanding of the GSE or agency guides, as applicable, and Appendix Q of the [ATR/QM] rule, the loan should retain its QM status even if the loan is put back or denied insurance or guarantee by a GSE or agency for an income-related reason.”

APPENDIX Q

The April 19 proposal would also amend Appendix Q of Regulation Z, which sets forth the standards for determining whether a loan satisfies the QM rule’s DTI requirements. The CFPB said the proposal would provide clearer rules for determining DTI. It would also amend language pertaining to a consumer’s employment record and income, obtaining business credit reports and other issues relating to self-employed consumers, and the treatment of Social Security and rental income.

Tessema Tefferi, senior regulatory affairs counsel with the National Association of Federal Credit Unions, supported the proposed removal of a requirement that would see

creditors attempt to determine the “probability of continued employment” by considering a consumer’s “qualifications for the position” and “previous training and education.”

“Requiring lenders to determine a consumer’s qualification for a particular type of employment as well as previous training and education is entirely inappropriate for what a lending institution should do and for which it is qualified,” Tefferi wrote. “A lending institution, absent the proposed change, could be subject to lawsuits or other challenges related to its determination about a consumer’s qualification. Thus, we agree that confirmation of present and past employment is adequate for purposes of verifying income.”

Davis requested that the bureau clarify that a proposal to examine only past and current employment applies even in special instances where the employment is inherently dependent upon contingencies outside employees’ or employers’ control — such as employees in legislative offices or political appointees.

“Such flexibility is required to ensure that all populations are adequately served,” Davis said.

Industry watchers say several additional ATR/QM rule issues remain. The bureau is expected to release further proposed clarifications and amendments in the future.

Numerous industry participants expressed concern that the bureau’s new mortgage rules and related requirements set forth under the under the Dodd-Frank Act will constrict credit availability and may lead to disparate outcomes for some borrowers — a result they fear could trigger fair lending issues under regulations and policies set forth by the Department of Housing and Urban Development (HUD) and the CFPB.

Eight major trade groups — including the U.S. Chamber of Commerce, American Bankers Association and Mortgage Bankers Association — recently wrote a comment letter to the CFPB and HUD urging the regulators to provide written assurances that complying with the bureau’s ATR/QM rules won’t increase institutions’ risk of a fair lending violation.

“Compliance with one regulation should not make it impossible to comply with another,” the groups wrote in a June 4 letter to HUD Secretary Shaun Donovan and CFPB Director Richard Cordray.

The groups noted that HUD recently finalized a Fair Housing Act rule that provides for liability for a facially neutral mortgage lending or servicing practice that has a disparate impact or “discriminatory effect” upon a protected class even in the absence of any intention to discriminate. The bureau has also signaled that the disparate impact theory of discrimination applies to and will create liability under the Equal Credit Opportunity Act.

As noted earlier, the CFPB’s ATR/QM rule requires lenders to verity a consumer’s ability to repay the loan according to its terms and provides lenders certain legal protections relative to this obligation when they write a QM loan. Many lenders concerned about the risks associated with ATR noncompliance have indicated they plan to write only QM loans that qualify for the strongest legal protections under the CFPB’s rule.

“We urge you to set out written guidance for the industry that makes clear that a lender will not be subject to disparate impact liability based on specific actions undertaken to avoid liability under the Dodd-Frank rules, such as making only or primarily QM safe harbor loans or limiting QM rebuttable presumption or non-QM loans to borrowers whose risks of

default are low,” the letter stated.

The letter also asked for guidance on how to square certain QM rule requirements with firms’ fair lending obligations. “Requirements for the QM, for example, include a 43 percent debt-to-income requirement, or eligibility for Fannie Mae and Freddie Mac purchase or guarantee. Yet there is no guidance as to whether and to what extent compliance with these requirements amounts to a sufficient business necessity that would avoid liability under the disparate impact rule,” the letter stated. “Likewise, there is little guidance on the standards used to assess less discriminatory alternatives in the context of complying with federal requirements. This lack of guidance will create great uncertainty, resulting in higher prices to account for risk and less available credit for consumers.”

During the ICBA National Convention and Techworld in March, Ben Olson, then deputy assistant director for the CFPB’s Office of Regulations, indicated the bureau is talking to HUD about potential fair lending issues involving the ATR/QM rules.

“We look forward to providing some more guidance on this in the future,” Olson said.

QM COMPLIANCE AND FAIR LENDING

CFPB ATR/QM Concurrent Amendments - Final Rule (12 CFR Part 1026)

May 31, 2013: The Consumer Financial Protection Bureau finalized highly-anticipated amendments to the ability-to-repay/qualified mortgage rules the agency released earlier this year. The final amendments differ from the bureau’s January proposal in important respects.

View the document at www.doddfrankupdate.com by clicking on the LIBRARY tab.

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An Insider’s

View of

Washington D.C.

The Consumer Financial Protection Bureau’s (CFPB) new mortgage rules represent a tectonic shift in regulation, and some industry participants fear they will not be prepared to comply with the bureau’s new requirements ahead of a January 2014 deadline, particularly given a flurry of proposed rule amendments released in recent weeks. However, bureau leaders are making it clear they have no plans to push back the rules’ effective date.

“Congress established an outside deadline for the effective date of the rules it directed us to write, and we set the effective date to reflect that deadline. We fully expect all institutions to be in compliance by next January,” said Richard Cordray, CFPB director, during a June 19 speech before the Exchequer Club in Washington, D.C.

The bureau recently finalized highly-anticipated amendments to the ability-to-repay/qualified mortgage (ATR/QM) rules the agency released earlier this year. As set forth in the proposal, the final amendments establish a new QM category for certain loans originated and held in portfolio by small creditors.

On April 19, the CFPB proposed additional amendments to the ATR/QM rule, along with other amendments impacting the bureau’s new servicing rules. Among other things, the proposal would provide clearer rules for determining a borrower’s debt-to-income ratio — a calculation that is key to determining whether a loan meets the CFPB’s QM criteria.

Cordray said the bureau would release another set of proposed mortgage rule amendments in the near future. He also said the proposed amendments arise from the CFPB’s commitment to respond to implementation issues identified by the industry and are part of the bureau’s overall strategy to help industry participants comply with the new rules.

“If we are to continue to facilitate the implementation process, there may be more adjustments at the margins over the coming months,” Cordray said. “We would make these adjustments with one aim in mind: to ensure the effectiveness of our rules by making compliance easier.

“We do not believe that this process should slow down the implementation process at any lender or servicer,” Corday continued.

Cordray also defended other aspects of the CFPB’s rulemaking process. He addressed complaints that the bureau’s rules are long and complex.

“The plain truth is that many businesses prefer comprehensive rules that answer more questions up front, leave less terrain undefined and uncertain, and minimize the prospect of protracted and costly litigation,” Cordray said. However, he added that in some instances, overly prescriptive requirements are not appropriate, and detailed and specific guidance can serve as an invitation to evade the law. Small institutions are also averse to complex regulations.

“Though a forest of intricate regulations may offer more comfort about the requirements of the law than a vague directive to act generally ‘in the public interest’ so familiar in other areas of agency regulation, it also comes at a cost, imposing substantial compliance burdens on smaller entities,” he said.

Cordray noted that the bureau is committed to gaining broad input to inform its rules. However, he acknowledged that “any human process will be imperfect” and the bureau is prepared to revisit its policy choices when warranted. He said the CFPB demonstrated this willingness to address its mistakes when it finalized its remittance transfer rule, only to pull the rule back when it determined that certain provisions would be impractical to implement.

“If we find over time that any of our substantive calls need to be reconsidered, we can and will face the issue frankly and address it,” Cordray said. “Although we were reluctant to revise [the remittance] rule so quickly, far better that we should get things right on the second try than stand fast out of a misguided sense of our infallibility.”

CFPB NOT BUDGING ON JANUARY EFFECTIVE DATE

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